Monthly Archives: September 2016

One Key Question to Ask When Selecting a Multi-Criteria Supplier Sustainability Monitoring Solution

In our last post on Key Questions When Selecting a Multi-Criteria Supplier Sustainability Monitoring Solution, we noted that not only can supply risk management not be siloed, but in order for it to be successful, it must be centralized through a CoE that puts together policies and procedures that not only ensure that

  • every supplier is covered
  • on all relevant dimensions
  • but not on irrelevant dimensions
  • without any duplication of effort

but also ensure that

    • there are no false positives in the risk assessment and
    • there are no false negatives

In order to effectively implement this holistic approach, an organization will require a good multi-criteria supplier and sustainability risk monitoring solution that can proactively monitor, assess, and re-asses supplier sustainability and risk using data from dozens, if not hundreds, of disparate sources that paint a comprehensive picture of supplier sustainability.

But not every platform will make the cut. Definitely not all will meet the integration requirements, which is one key requirement of a good platform. More specifically, ethics, corporate social responsibility, and sustainability information is vital information that can and should be used in many different supply management platforms such as e-Sourcing, e-Procurement, CLM, SRM and other platforms that support a wide variety of supply management processes and workflows. As such, this integration should be trivial and for major supply management platforms, almost “out-of-the-box”. Moreover, in some organizations, this information also needs to be available to other departments that, and no surprise here, are reliant on different platforms and responsible for smaller or indirect spends not (fully) under the control of Procurement. As such, the platform needs a well defined, and easy to use, API that can allow the data to be pulled out for any platform that needs it, and that allows any proprietary or limited access data the organization has access to on the supplier’s sustainability and risk profile to be pushed into the system. Why?

For more complete details on this requirement, as well as key questions to ask when evaluating a multi-criteria supplier sustainability monitoring solution, check out Sourcing Innovation’s latest white paper on 5 Essential Criteria for Selecting a Supplier Sustainability & Risk Monitoring Solution, sponsored by Ecovadis, that will help you understand just what a good sustainability and risk monitoring solution needs to do.

Avetta – Vetting Your Suppliers So You Can Have Confidence

Avetta, formerly known as PICS Auditing, is a solution for companies that need to do formalized vendor pre-qualification on their mid-size, small, and micro-contractor and service providers to ensure that those contractors conform to health, safety, environmental, and other relevant legislation that these organizational (service) providers need to adhere to in order to maintain a safe environment, minimize risk, and minimize organizational liability. (A single fatality, especially one that could have been easily prevented with the proper training and certification, can cost a large organization five million or more in a settlement. Not only does the organization potentially lose a valuable contractor, but they lose a big chunk of change they can’t afford to lose and hope to remain viable.)

Despite being relatively unknown in the Procurement world (but then again, how many of you know of providers like Browz, VendorMate, or even Achilles), it is a well-known big name in industries that rely on heavily on contractors (think energy companies, cable companies, wireless companies, and other utilities) that has seen year-over-year growth in the 30% range since its humble beginnings 15 years ago.

While the solution is essentially an enhanced supplier information management (SIM) platform customized for credentialing, certification, and contractor capability tracking with respect to health and safety, sustainability, and other specific needs, unlike traditional SIM platforms, the solution allows the questions and profiles to be configured for each supplier based upon service(s) provided, risk profile, and/or industry.

One of its main strengths is the supplier-centric data view — the supplier owns their data and chooses whom they show it with. This means that every buyer can benefit from the economy of scale as Avetta grows as suppliers that have been qualified to a sufficient level by a competitor will be suitable for the organization. It’s a platform where you benefit from every competitor using it. After all, in a large, dense, city, there are going to be thousands of choices, and having a pre-qualified pool of dozens, or hundreds, can be very helpful. Similarly, in a small town or isolated region, there’s only going to be one or two contractors, and they are not going to have the time or interest to go through an audit for every company that wants to use their services twice a year.

Avetta‘s definitely a platform to check into if your organization uses a lot of contractors and you don’t have a good, holistic, vetting and certification process, and one that you can find out a lot more about by checking out the Spend Matters Pro (membership required) pieces (Part I with Parts II and III coming soon) co-authored by the doctor and the prophet.

While most organizations don’t think they need a credentialing solution, they don’t realize just how much effort it is to do a proper job manually, or how many suppliers don’t get closely vetted just because they present an insurance form or a certification from 3 years ago (that is still valid but expires in a month). Insurance just means the supplier can afford it and a certification just means that at one point in time someone knew enough to get it. It doesn’t mean they have good processes, or that they can do everything they say they can do with the same level of competence that they got the certification for (which they may lead you to believe). For example, just because their employees passed a safety course in equipment handling, doesn’t mean the employee ever passed one for working on poles or the outside of high-rises. And what is more likely to injure them? A piece of electrical equipment that shorts out and gives them a mild shock, or falling 30 feet onto pavement. Think about that.

Influential Sustentation 96: Consortiums

Consortiums, better known as Group Purchasing Organizations (GPOs), will be one of your biggest organizational conundrums of the decade. Regardless of whether your organization is currently using a GPO or not, with the need to save money in every category in your tail spend, the next few years will be the years that you can’t live with them, you can’t live without them.

GPOs are going to be pushed upon you by under-informed CFOs because the believe that a GPO will be able to leverage economies of scale, in the form of more volume and more efficiencies, then the organization can achieve on its own.
For example, a supplier might offer price reductions at 1,000 units, 10,000 units, and 100,000 units and offer 2%, 3%, and 6% discounts at each price level. On its own, an organization that only buys 20,000 units would only be able to obtain the 3% discount but if it banded with five other organizations that required a similar amount of units, each organization could obtain the 6% discount. In addition, if only one contract needed to be negotiated and cut, each organization could reduce the amount of negotiation and administration overhead required to negotiate the contract and save even more. Theoretically.

But all of this comes at a cost. First of all, the GPO has to be funded — so, either the organization has to pay a fixed membership cost every year or a percentage of each transaction. Secondly, the GPO has to be managed just like every business processing outsourcing (BPO) provider. This isn’t always easy because not only does the organization have to manage the relationship and insure that the GPO is working on categories that are important to the organization, but it has to make sure that the GPO is taking the organization’s needs into account. And, the double edged sword, the best deals materialize when the combined volume allows a supplier to hit peak production (which allows them to produce the product at the lowest possible cost) and offer their customers the lowest possible cost. However, getting to peak production often requires combining the needs of a dozen or so different organizations, each of which has its own viewpoints and goals for each category. In other words, while you might prefer Supplier A’s products, because your Engineering department feels that they are of superior quality, the other GPO participants might prefer Supplier X — the least favoured supplier of your organization.

So what do you do?

1. Categorize all of your unmanaged spend.

You need to understand how much spend is each category, how much savings is likely available from (better) management, how much savings you could get if you began to manage it yourself, and how that would compare, using market average GPO statistics on savings and GPO overhead, to having a third party manage it. If you could save 2%, but the overhead to save that is 30%, that’s 1.4% savings at the end of the day. If the GPO can save 3%, and the amortization of the fixed and transaction fees work out to 40% of that, that’s a 1.8% savings, and throwing it over the wall might not be worth it. But if the GPO can save 5%, and they are really efficient on that category and their fees work out to 20% of the savings, that’s a 4% savings and you strongly consider throwing it over the wall.

2. Identify the Candidate GPO spend.

Identify all categories that the GPO could save enough on to make it worthwhile, then remove any categories too strategic to the business to hand over to a third party, and then remove any categories where they are primarily being sourced from a strategic or high-volume supplier and where they could be added on to an existing or renewal contract.

3. Estimate the Realizeable Savings from the Candidate GPO Spend

How much is being spent? How much of that could be saved based on industry average statistics? What would it cost to obtain that savings in total fees and overhead? What would really be saved? What is the real ROI?

4. Determine if the ROI is worth it.

If the ROI is not at least a factor of three, by the time you factor in all the change management, learning headaches, and delayed savings, it’s probably not worth the GPO. If it is, it probably is. Make your decision, and then present the detailed calculation to defend your position, and don’t waffle. If you can save, do it, and evaluate in 3 years. If you can’t, just get the best damn tail spend management you can and do better. But you can’t be constantly evaluating, reevaluating, and bickering about it. Do it. Or don’t. No in-between.

Procurement is Still the Rodney Dangerfield of the Organization and Land of Confusion Is Its Theme Song

Why else would we need an egalitarian Procurement Revolution where we must work collectively to shape and drive change?

But in all seriousness, the numbers don’t lie. If you check out Five Imperatives for Creating Greater Procurement Agility, which was recently (and still may be) temporarily free from The Hackett Group, you see that the average Procurement Function Operating Budget is forecasted to increase a mere 1.1% this year. Now, that’s better than last year where it was forecasted to increase a mere 0.7%, but when you consider the average annual US inflation rate from 2000 to 2015 was 2.25% (which you can verify on a number of sites), relatively speaking, Procurement is still getting further and further behind every year!

This is despite the fact that world-class procurement (which needs to be properly funded), has an average payback that is twice that of the Procurement peer group. And, as far as the doctor is concerned, the argument that, since world-class procurement organizations have 18% lower operating costs than the peer group, Procurement doesn’t need as much money, doesn’t pass muster because “operating” costs are different from “capital” costs and might or might not include “training” costs or “travel” costs.

If the organization is doing a lot of outsourcing, then a lot of travel is needed by procurement, engineering, etc. for relationship and quality control site visits, and if all of this has to come out of the Procurement budget, as opposed to the operations budget, that’s not fair. If Procurement is not allowed to spend “capital” to acquire a new system, but must instead use a SaaS solution so it can be expensed monthly under the “operating” budget, while manufacturing and warehousing gets a budget that does not include the ERP upkeep, that’s not fair. If Procurement is subject to the across-the-board training ban, because people should know their jobs when they are hired, and are deprived of the ability to advance their skills, not only is that not fair, but that can be costing the organization millions of dollars as sometimes a better informed and prepared procurement professional can shave an extra percentage point off of a hundred million dollar buy, which makes the 10K it cost to send the person to a 3 day workshop paltry in comparison.

Plus, when sales has to increase revenue by $10 to equal the same savings that Procurement often makes by taking $1 off of the bottom line, it should, logically, make sense to throw money at Procurement instead of the marketing mad men or the house of lies consulting firm. But it doesn’t, proving that most board rooms are still cemented in the land of confusion and Procurement is still the Rodney Dangerfield that don’t get no respect with a kick-me sign on its back.